By Max Clarke

Lending under the Government’s flagship small business lending scheme, the Enterprise Finance Guarantee (EFG) scheme has fallen by a further 31% in the last three months, down from £144m in the third quarter 2010 to just £99m in the fourth quarter 2010 says Aldermore, the new British bank.

This is the lowest quarterly figure for the scheme since it was launched.

Lending under the Government’s flagship small business lending scheme peaked in Q2 2009 and has been on the slide since then. Lending through the EFG scheme is now just 39% of its level a year and a half ago (£255m, Q2 2009).

Says Phillip Monks: “The trend in lending through the EFG scheme is anything but healthy.”

“The Government is very interested in helping small businesses and I don’t think they would want to see lending through the EFG shrink any further. If lending through this scheme does not bounce soon then perhaps the Government ought to see what it can do to get it back on track.”

“Making the scheme more attractive to either the banks or to businesses would not be too expensive.”

Phillip Monks says he is particularly disturbed by the decline in lending under the EFG as recent Bank of England data suggests that overall bank lending to SMEs also continues to decline.

Says Phillip Monks: “The EFG is there to encourage banks to lend to small businesses — if lending through both EFG and all other forms of lending is in decline where are SMEs going to get sensibly priced funding?”

“Whilst Aldermore is lending at record levels to small businesses and we plan to keep expanding we are obviously not yet big enough to plug the entire funding gap.”

“All parts of the economy depend on a healthy small business sector — it’s a cliché but small businesses really are the lifeblood of the UK economy. If funding for small businesses dries up the entire food chain collapses.”

Phillip Monks says that his bank’s assessment is that there are too many small businesses that have robust finances, good management and sensible expansion plans that are being deprived the capital needed to invest and grow their businesses.

Adds Phillip: “We look very closely at these businesses — they are sound. So far, the risks they present in terms of bad debts have been well below what we expected.”

Aldermore, the new British bank, has more than doubled the amount of lending it provides to small and medium sized enterprises (SMEs) in just a year. At the end of 2010 the bank had outstanding loans to SMEs of £410.2m; an increase of 107% on the £198.6m 12 months ago.

How can lending to SMEs via the EFG scheme be increased?

The Government’s guarantee of lending under the EFG is capped at 9.75% of total funds lent out by each bank. The cap on the guarantee is set to be reduced even further to 9.225% (from April 1 2011).

Says Phillip Monks: “Rather than reducing the EFG guarantee for lenders, increasing the guarantee is one way the Government could encourage the big banks to lend more to small businesses.”

“The Government could also consider reducing the fees that it charges small businesses for using the EFG scheme.”